Procurement Methods in Construction - Essay Example

Procurement Methods in Construction By Introduction Construction procurement refers to the actions that a clientor an employer will take for the construction of or repairs to or remodelling of a building (Joint Contracts Tribunal). More specifically, procurement refers to a system in which individual ‘responsibilities and authorities’ are assigned to ‘people and organisations,’ and each of the construction components are defined (Davis, Love, and Baccarini, 2008: 6). Clients and employers have a number of procurement routs from which to choose. Each procurement route has both advantages and disadvantages. Thus selecting a procurement route involves taking some risks (Tookey, Murray, Hardcastle, and Langford, 2001). For the purposes of our project three construction procurement routes are considered: accelerated traditional method, novated design and build method, and construction management method. An accelerated traditional procurement method is the selection of the conventional procurement route with key modifications for accelerating or fast tracking the project (Emmit and Gorse, 2003). The novated design and build method generally refers to a consultant switch in which the contractor is asked to assume responsibility for the ongoing design Greenhalgh & Squires, 2011). The construction management method refers to a process in which the construction project is managed by a party which is typically ‘independent of the construction work’ (Jackson, 2004, p. 45). This paper will describe these procurement methods in detail and will also discuss partnering in construction procurement. Accelerated Traditional Procurement Method The accelerated traditional procurement method occurs through a modified tender system which permits the construction project to commence earlier than it would ordinarily commence (Davis, et al., 2008). What typically happens is the ‘overlapping’ of ‘design and construction activities’ and this usually means that one party assumes responsibility and the risk involved in both design and construction, (Davis, et al., 2008, p. 13). In the accelerated traditional procurement method, a contractor enters the project at an earlier phase than he or she would under the traditional procurement method. Upon entering the project at an earlier phase, the contractor does not have complete information. The contractor enters the project either through negotiation or through competitive tendering. Thus the contractor is involved before the final design is completed and thus construction works overlaps with the design with the contractor assuming consultant role with respect to the ongoing design (Singh, 2001). The advantages of the accelerated traditional procurement method is the fact that the design and construction processes overlap. This means that the contractor gets a head start on the construction project. However, the disadvantage is that since construction begins prior to the completion of the design, the contractor may be forced to make changes to the construction works and this can cause delay and expenses not previously contemplated by the parties to the procurement contract (Singh, 2001). The accelerated traditional procurement method is typically used when time is of the essence. In this regard, time is so important to the completion of the construction work that cost is not a priority. As Masterman (2003:41) explains it is agreed among procurement experts that the accelerated procurement method is used with the understanding that ‘a cost premium is usually paid’ when taking this approach. As a result, the client is informed that there is a ‘need for price certainty to be a secondary consideration’ (Masterman, 2003: 41). However, the fact that the contractor gets an earlier start to the construction works, the time saved can usually offset the cost involved when alterations are made to comply with a fluid and changing design, if and when changes are made to the design (Masterman, 2003). As Masterman (2003) argues, there are always risks associated with any procurement route and both clients and contractors are rarely able to eliminate all risks associated with increased cost in a construction project. There are also concerns that since the construction works commence prior to the completion of the design, the contractor may inflate his or her fee. However Masterman (2003) argues that a fixed method for measuring and adjusting fees and cost is typically agreed in advance and this will usually ensure that the contractor will not be able to submit inflated and excessive fees. In other words, fee increases must be justified and observably necessitated by construction works and design overlap. Moreover, the fixed method for measuring and adjusting fees and cost ensures that project completion delays are minimized and the project can be fast tracked as contemplated by the accelerated traditional procurement method (Masterman, 2003). The Novated Design and Build Method The novation design and build method is described as an innovated version of the design and build method. In the design and build method the contractor is involved in the whole of the project from design to build, as opposed to segregating the design of the project from the actual construction of the project (Lam, Chan, and Chan, 2004). Under the design and build procurement method, the contractor is responsible for selecting the design team (Ng and Skitmore, 2002). Under the novated design and build procurement method, the design of the project experiences what is referred to as a shift in consultancy. In actuality, under the novated design and build procurement method, ‘the design team’s obligation to the client gets transferred to the contractor’ who in turn assumes responsibility ‘for carrying out the detailed design work at a later stage of the project life cycle’ (Doloi, 2008: 1181). The interaction and relationships between the client and the initial design team is important because it forms what amounts to a preliminary outlay of the intended project. Once the preliminaries are out of the way and a contractor is brought it, the contract for design is terminated and a new contract with the contractor takes over the design. Thus the relationship and interaction between the design team and the contractor is also important for paving the way forward with the initial design (Doloi, 2008). The novated design and build procurement method is the most frequently used procurement method in Australia from the design and build of large residential projects and commercial projects (Doloi, 2008). It is believed that the novated design and build procurement project is preferred in commercial projects and large residential projects because it places responsibility for the entire project in one party and facilitates a more organized project management system and in doing so reduces the risk of cost inflation and undue delay (Doloi, 2008). The main advantage of the novated design and build procurement method is that the design team is able to divest itself of contractual liabilities which are assumed by the contractor once the contractor enters the project. The client obviously benefits from this arrangement. However, the contractor suffers a disadvantage in that the contractor is left to identify and manage all risks associated with the entire project from design to build (Ng and Skitmore, 2002). The advantages of the novated design and build procurement method is associated with the fact that it is a good fit for a project where time is of the essence. However, a major disadvantage is the fact that the cost are usually fixed as funds are restricted and the project can be highly technical (Ng and Skitmore, 2002). Thus the completion of a highly technical project within a fixed timeframe on a fixed budget can be especially daunting. This puts a significant amount of pressure on the contractor who comes in assumes the burden of completing the highly technical project on a fixed budget within a fixed timeframe. Meanwhile, the client benefits from the transfer of total responsibility to the contractor. Construction Management Method Under the construction management procurement method, ‘the management service is provided by a fee-based consultant, a specialist construction manager’ and each of the parties negotiate and conclude their works contracts with the client and the contractors (Greenhalgh and Squires, 2011:122). Thus as Greenhalgh and Squires (2011) explain, the primary distinction between procurement process and the procurement management contract: …is that, with this approach, the client themselves enters into a direct contract with the individual package contractors, whereas with management contracting, the contracts are between the management contractor and the work-package contractors (122). The construction manager comes in and assumes the role of a mediator who manages and coordinates all of the different aspects of the project (Greenhalgh and Squires, 2011). The main components of the construction management procurement method is that the construction manager comes in as a consultant in the beginning of the project and is on equal terms with the design team. Secondly, the ‘reimbursement is made by means of a lump sum or percentage fee for management services’ (Greenhalgh and Squires, 2011:122). The actual construction of the project is conducted by each contractor ‘employed by the client’ and ‘co-ordinated, supervised and administered by the construction manager’ (Greenhalgh and Squire, 2011:122). The main advantage of the construction management procurement method is that it provides for a system in which experts in management are in control of the project. At the same time, there is a control mechanism in place which provides for greater organization and risk management. Moreover, with a construction management team at the helm, cost is said to be minimized. With construction expertize involved, it is believed that risks and delays are also minimized. Moreover, since the construction manager has input in the design at the beginning, the project may be constructed without delay and more easily (Greenhalgh and Squire, 2011). Another advantage is that since the client negotiates with each of the contractual parties, costs and risks can be fixed more directly by the client. However, the main disadvantage to this procurement method is that it places significant pressure on the construction management team to complete the project without delay and through the minimization of costs. However, in an effort to meet these expectations, the construction management team can be expected to incur significantly more costs than initially contemplated (Greenhalgh and Squire, 2011). The disadvantage for the client is that the client commences the project as a ‘first works contract’ and are ‘therefore irrevocably committed to the project’ while at the same time unaware of the ‘final out-turn costs’ (Greenhalgh and Squires, 2011: 129). Nevertheless, this disadvantage appears to be familiar to all ‘early commencement’ procurement routes without exception (Greenhalgh and Squires, 2011: 129). It therefore follows that whenever a client wishes to start a project early with a view to timely completion, the risk of cost adjustments and/or inflation will remain a concern throughout. As previously stated, it would be of a great benefit to all the parties concerned if cost was a secondary concern. Partnering in Construction Procurement It has been submitted that given the complex and technical nature of construction projects in a rapidly changing, technologically driven world, there is an increased need for a departure from the ‘adversarial’ construction procurement routes (Hasanzadeh, Hosseinalipour, and Hafezi, 2014: 811). What is now needed is a ‘change in culture and attitude in the construction industry’ that is characterised by cooperation and collaboration (Hasanzadeh, et al., 2014: 118). What this means is that there is a need for partnerships in construction procurement (Hasanzadeh, et al., 2014). In the public sector, the construction procurement partnership is understood as an innovative approach to construction. In this regard, the government partners with a private sector party on the basis that the government lacks the expertise and skills necessary for managing the construction project and in lean times, lacks the requisite finances to construct a quality project and manage the services offered upon completion of the project. In order to provide quality infrastructure and post-construction services, the government culls together the ‘collective energies of the government’ and private sector expertise (Lawther and Martin, 2005: 212). Thus the public private partnership envisioned via construction procurement partnerships provides the best method for achieving ‘value for money’ (Bing, Akintoye, Edwards, and Hardcastle, 2005: 25). One such private public partnership is the Private Finance Initiative which is used in the UK. This partnership attempts to transfer risks from the public sector to the private contractors involved in the project. Thus in order for the contractor to minimize risks or to avoid engaging in a contract that results in a total loss, it is necessary to assess and predict risks prior to concluding a partnership agreement (Bing, et al, 2005). Thus the main advantages of construction procurement partnerships are for the benefits of the public at large and the governments who seek to engage in construction procurement partnerships. The government’s investment is meagre compared to the private funding involved as the private party’s involvement in the project typically carries on in the post-construction phase. In the post-construction phase, the private party is permitted to operate the completed infrastructure for a period of time and with a view to recovering cost accumulated in the construction of the infrastructure (Bing, et al., 2005). In this regard, the burden on tax payers is minimized as the government is able to provide a service and infrastructure that exceeds its budget without having to spend. The main disadvantages associated with construction procurement partnerships is that there are a number of different experts involved in the construction project and this can result in a number of problems associated with shared risks and information (Bing, et al., 2005). As a result undue cost and delays can be incurred and this is especially problematic for the construction team who will usually have less control over the project as the private sector funding the project retains control in partnership with the government. The construction team may have a minimal role as a technical consultant but ultimately must defer to the private funding team and the government who has partners with the private team funding the project (Bing, et al., 2005). Bibliography Bing, L.; Akingoye, A.; Edwards, P.J. and Hardcastle, C. 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(February 2001). ‘Construction Procurement Routes: Re-defining of Construction Procurement.’ Engineering Construction and Architectural Management, Vol. 8(1): 20-30. Read More